Assessing the Internal Environment of the Firm

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Chapter 3

• Assessing the Internal Environment of the Firm

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Learning Objectives

• 1. Be aware of the limitations of SWOT analysis
• 2. Understand value chain analysis and its
  benefits
• 3. Understand the resource based view of the firm
  and how a resource can lead to a competitive
  advantage.
• 4. Be aware of the usefulness of financial ratio
  analysis, its inherent limitations, and how to
  make meaningful comparisons of performance across
  firms.
• 5. The value of recognizing how the interests of
  a variety of stakeholders can be interrelated.

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Limitations of SWOT Analysis

• Strengths may not lead to an advantage
• SWOTs focus on the external environment is too
  narrow
• SWOT gives a one-shot view of a moving target
• SWOT overemphasizes a single dimension of
  strategy

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Value Chain Analysis

• Sequential process of value-creating activities
• Value - The amount that buyers are willing to pay
  for what a firm provides them
• Value is measured by total revenue
• Firm is profitable to the extent the value it
  receives exceeds the total costs involved in
  creating its product or service

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The Value Chain
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Inbound Logistics

• Associated with receiving, storing and
  distributing inputs to the product
• Location of distribution facilities
• Material and inventory control systems
• Systems to reduce time to send returns to
  suppliers

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Operations

• Associated with transforming inputs into the
  final product form
• Efficient plant operations
• Appropriate level of automation in manufacturing
• Quality production control systems
• Efficient plant layout and workflow design

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Outbound Logistics

• Associated with collecting, storing, and
  distributing the product or service to buyers
• Effective shipping processes
• Efficient finished goods warehousing processes
• Shipping of goods in large lot sizes
• Quality material handling equipment

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Marketing and Sales

• Associated with purchases of products and
  services by end users and the inducements used to
  get them to make purchases
• Highly motivated and competent sales force
• Innovative approaches to promotion and
  advertising
• Selection of most appropriate distribution
  channels
• Proper identification of customer segments and
  needs
• Effective pricing strategies

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Services

• Associated with providing service to enhance or
  maintain the value of the product
• Effective use of procedures to solicit customer
  feedback and to act on information
• Quick response to customer needs and emergencies
• Ability to furnish replacement parts
• Effective management of parts and equipment
  inventory
• Quality of service personnel and ongoing training

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Procurement

• Function of purchasing inputs used in the firms
  value chain
• Procurement of raw material inputs
• Development of collaborative win-win
  relationships with suppliers
• Effective procedures to purchase advertising and
  media services
• Analysis and selection of alternate sources of
  inputs to minimize dependence on one supplier
• Ability to make proper lease versus buy decisions

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Technology Development

• Related to a wide range of activities embodied in
  processes and equipment and the product itself
• Effective RD activities for process and product
  initiatives
• Positive collaborative relationships between RD
  and other departments
• State-of-the art facilities and equipment
• Culture to enhance creativity and innovation
• Excellent professional qualifications of
  personnel
• Ability to meet critical deadlines

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Human Resource Management

• Activities involved in the recruiting, hiring,
  training, development, and compensation of all
  types of personnel
• Effective recruiting, development, and retention
  mechanisms for employees
• Quality relations with trade unions
• Quality work environment to maximize overall
  employee performance and minimize absenteeism
• Reward and incentive programs to motivate all
  employees

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General Administration

• Typically supports the entire value chain and not
  individual activities
• Effective planning systems
• Ability of top management to anticipate and act
  on key environmental trends and events
• Ability to obtain low-cost funds for capital
  expenditures and working capital
• Excellent relationships with diverse stakeholder
  groups
• Ability to coordinate and integrate activities
  across the value chain
• Highly visible to inculcate organizational
  culture, reputation, and values

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Relationship Between Activities

• Interrelationships among activities within the
  firm
• Relationships among activities within the firm
  and with other organizations (e.g., customers and
  suppliers) that are part of the firms expanded
  value chain.

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Discussion Topic 1

• How does the value chain analysis apply to
  service firms?
• What are the inbound logistics, operations, and
  outbound logistics for Orbitz.com? What about
  Idaho State University?
• What value chain activities create the most
  revenue for Orbitz? ISU?

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Resource Based View

• Two perspectives
• The internal analysis of phenomena within a
  company
• An external analysis of the industry and its
  competitive environment
• Three key types of resources
• Tangible resources
• Intangible resources
• Organizational capabilities

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Tangible Resources

• Relatively easy to identify, and include physical
  and financial assets used to create value for
  customers
• Financial resources
• Physical resources
• Organizational Resources
• Technological Resources

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Intangible Resources

• Difficult for competitors (and the firm itself)
  to account for or imitate, typically embedded in
  unique routines and practices that have evolved
  over time
• Human
• Innovation
• Reputation
• Culture

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Organizational Capabilities

• Competencies or skills that a firm employs to
  transform inputs to outputs, and capacity to
  combine tangible and intangible resources to
  attain desired ends
• Outstanding customer service
• Excellent product development capabilities
• Innovativeness of products and services
• Ability to hire, motivate, and retain human
  capital

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Valuable Rare

• resources can be a source of competitive
  advantage only when they are valuable - Enable a
  firm to formulate and implement strategies that
  improve its efficiency or effectiveness
• Organizational resources also possessed by
  competitors are not sources of competitive
  advantage
• Common strategies based on similar resources give
  no one firm an advantage
• Competitive advantages are gained only from
  uncommon resources, resources that are rare to
  other competitors

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Inimitable

• Difficulty in imitating resources is key to value
  creation because it constrains competition
• Profits generated from inimitable resources are
  more likely to be sustainable
• Physical uniqueness
• Path dependency
• Causal ambiguity
• Social complexity

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Substitutability

• There must be no strategically equivalent
  valuable resources that are themselves not rare
  or inimitable
• Substitutability may take at least two forms
• Competitor may be able to substitute a similar
  resource that enables it to develop and implement
  the same strategy
• Very different firm resources can become
  strategic substitutes (such as e-business as a
  substitute for physical retail facility)

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Implications of the RBV
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Discussion Topic 2

• Identify a firm which currently has a competitive
  advantage according to the resource based view of
  the firm?
• Identify two examples of where large firms spent
  millions of dollars promoting or marketing
  something that did not or will not lead to a
  competitive advantage.

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Division of Profits

• The percent of profits that employees will retain
  depends on several factors
• Employee bargaining power
• Employee replacement cost
• Employee switching costs
• Management bargaining power
• If employees are getting a higher percent of
  profits than they deserve, other factors such as
  poor governance may be to blame.

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Evaluating Firm Performance

• Two approaches for evaluating firm performance
• Financial ratio analysis
• Stakeholder perspective
• Balanced Scorecard
• balancing stakeholder concerns should not be a
  zero sum game.

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Ratio Analysis

• Five types of financial ratios
• Short-term solvency or liquidity
• Long-term solvency measures
• Asset management (or turnover)
• Profitability
• Market value
• Meaningful ratio analysis must include
• Analysis of how ratios change over time
• How ratios are interrelated

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Historical Comparisons
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Compare with Industry Norms
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Compare with Key Competitors
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The Balanced Scorecard

• Provides a meaningful integration of many issues
  that come into evaluating a firms performance
• Four key perspectives
• How do customers see us? (customer perspective)
• What must we excel at? (internal perspective)
• Can we continue to improve and create value?
  (innovation and learning perspective)
• How do we look to shareholders? (financial
  perspective)

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Balanced Scorecard Cont.

• Customer perspective -
• Timeliness
• Quality
• Performance and service
• Cost
• Internal Perspective
• Cycle time,
• Quality
• Employee Skills
• Productivity
• Resources and capabilities

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Balanced Scorecard Cont.

• Innovation Learning
• Introduction of new products and services
• Greater value for customers
• Increased operating efficiencies
• Financial Control
• Profitability Growth
• Shareholder value
• Increased market share
• Reduced operating expenses
• Higher asset turnover

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Limitations of the Balanced SC

• Lack of a clear strategy
• Limited or ineffective executive sponsorship
• Too much emphasis on financial measures rather
  than nonfinancial measures
• Poor data on actual performance
• Inappropriate links to scorecard measures to
  compensation
• Inconsistent or inappropriate Terminology

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Objectives

• 1. Be aware of the limitations of SWOT analysis
• 2. Understand value chain analysis and its
  benefits
• 3. Understand the resource based view of the firm
  and how a resource can lead to a competitive
  advantage.
• 4. Be aware of the usefulness of financial ratio
  analysis, its inherent limitations, and how to
  make meaningful comparisons of performance across
  firms.
• 5. The value of recognizing how the interests of
  a variety of stakeholders can be interrelated.